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More reviews by Wayne E. Yang
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The Dollar Crisis: Causes, Consequences, Cures by Richard Duncan
Contrarians must be champing at the bit when they see today's bullish pundits arguing that U.S. budget and trade deficits do not matter. For evidence, such bullish pundits point to the "fact" that the deficits run up during the Ronald Reagan's administration failed to sink the U.S. Economy, conveniently forgetting that Reagan eventually became concerned enough about a ballooning budget deficit that he raised taxes during his second term.
The U.S. dollar recently hit multi-month lows against the Euro and other currencies. That is counter to the strengthening trend we saw earlier this year, when signs of a recovering U.S. economy had bulls arguing that a commensurate rise in interest rates would re-attract flows back into the U.S. dollar. Dollar bulls were probably hoping that the recovering economy would help the United States grow out of its deteriorating credit situation. Americans continue to import more goods than they export; current policymakers continue to seek tax cuts even as spending remains high, and the U.S. financial system remains heavily dependent on foreign investors recycling their dollars back into the United States. High energy prices also still weigh on the U.S. economy. About a year ago, RICHARD DUNCAN in his book THE DOLLAR CRISIS: CAUSES, CONSEQUENCES, CURES warned that the United States ignored those concerns at its peril. With the dollar retesting support levels, it is useful to revisit Duncan's book.
Some dollar bulls blame the new decline in the dollar on the hedge fund community's shorting of the currency, as if the decline were solely due to technical considerations and that fundamental considerations were irrelevant. They argue instead that U.S. jobs numbers are recovering and that GDP growth indicates a booming economy. They argue that recent slowdowns in both those growth rates are probably aberrations. Some even argue that the United States can indefinitely support a negative trade imbalance. Others are not so sanguine. Hedge fund manager Marc Faber in early July warned that "the dollar is certainly grossly over-valued against the Asian currencies." Investment guru Warren Buffet, alarmed by the U.S. trade deficit, has moved billions of dollars into non-U.S. Dollar currencies.
About a year ago, Duncan warned us: "How much longer will the rest of the world be willing to accept debt instruments from the United States in exchange for real goods and services? It is only a matter of time before the United States will no longer be considered creditworthy. In fact, it really is only a matter of time before the United States will not be creditworthy. This is the reason that a dollar crisis is inevitable. Before the passage of too many years, the dollar will depreciate very sharply against other currencies and gold. The era of export-led growth will then come to an end. From that time on, the U.S. current account deficit will no longer be able to function as the engine of global growth as it has for the last two decades."
He explains that the world's balance of payments is severely out of whack: that the United States' export-led economy is creating fundamental problems in the "international monetary system as it now functions." First, the health of the global economy depends on the United States going steadily deeper into debt to the rest of the world. Second, the system encourages asset bubbles in countries with balance of payments. And third, the system "continues to flood the world with excessive credit creation."
Curiously enough, however, Duncan also said that the United States could temporarily stave off the more disastrous consequences of the deficits if they simply grew the budget deficit: "The fate of the dollar in the near term may hinge on how quickly and by how much the U.S. budget deficit widens. Very large deficits exceeding U.S.$500 billion annually would supply the secure dollar-denominated assets needed to recycle the rest of the world's dollar surpluses." Perhaps not so coincidentally, the U.S. budget deficit is predicted to hit a record US$445 billion this year. Yet Duncan warned that running such deficits could not serve as a permanent solution: "Not even the U.S. government could sustain budget deficits of that size indefinitely."
Duncan's solution, unfortunately, will strike some as overly ambitious. He proposes that the developing world find a way to increase its wage rates in a bid to better equalize the balance of trade between the developed and developing world. "In order to achieve balanced growth on a worldwide scale, the people producing the goods also have to be able to afford them... The overwhelming wage differentials between the developing world and the advanced nations is so great that the international balance of payments can only become increasingly unbalanced under the present regime of relatively free trade." The question, of course, is whether the world has the political will to realize that there is a problem.
Wayne E. Yang
14/08/2004
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Wayne E. Yang is based in New York, where he lives with his wife and two children. His web site is www.wayneyang.com. |
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